A Richer Shade of Green: The Wisdom of Sustainable Investment Funds

June 8, 2011

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American capitalism must resolve the dead-end clash between conventional economic growth and the limits of nature. The choice is not optional. Investors who ignore the challenge will eventually be crumpled by the consequences. Investors depend on perpetual economic growth to spur profits and raise stock prices. Economic growth depends on raw materials and energy from fossil fuels. Raw materials and fossil fuels are not a growing part of the ecosphere. Therefore, investors cannot expect perpetual profits unless we figure out how to have growth without depleting natural resources.

The need to put a premium on sustainability is not widely acknowledged in the investment community and certainly not among our elected officials, policy-makers and advisers. This presents an opportunity for astute companies and investors. In the long term, companies will benefit from aggressive action to dematerialize, substitute renewable energy for fossil fuel–based sources, increase energy efficiency, reduce water use and promote reuse, and tighten up sourcing and distribution channels. Investors with an eye on long-term gains will seek companies that are addressing these issues.

Fund managers in the business of facilitating socially and environmentally responsible investments are, in turn, developing methods to gauge companies’ commitments to sustainability. My firm, for example, avoids investing in companies like BP that insist on high-risk, fossil fuel–based growth. Instead we seek out companies like Itron, which helps utilities improve their energy efficiency; Ormat, which is developing geothermal energy; and Google, which is seriously addressing its biggest ecological risk—the cost and availability of electricity to power its servers.

Conventional investors might argue that discounting traditional growth strategies is counterintuitive, if not counterproductive. In the United States, growth has been the panacea—real or aspirational—for social and financial inequity, skyrocketing debt obligations and political stalemates. Particularly when times are tough, it’s convenient to rely on old-fashioned growth—the kind that depletes natural resources, overtaxes ecosystems, fills the ecosphere with pollutants, erodes arable land and disrupts the climate. But according to the Global Footprint Network, it would take 1.5 earths to keep up with the present pace of human consumption. Any financial analyst should know that this kind of growth is a recipe for disaster. We cannot borrow another earth.

So why not use technology and innovation to dramatically reduce consumption? This is exactly what we need to do, but it is not happening. According to William Rees of the University of British Columbia, between 1975 and 2000, consumption increased 57 percent in the United States despite monumental technological breakthroughs and innovations. On a per capita basis, the increase was 23 percent—partly the result of escalating consumption and partly because of population increases. This pattern is reflected on a worldwide basis: population is expected to surpass 9 billion by 2050, and emerging economies are striving to increase standards of living, which currently equates to increases in consumption.

The combined pressures of population and consumption increases are stressing our natural systems, causing climate change and depleting resources. In the absence of concerted political will and commitment from government (which balks at any strategy that could slow GDP growth, even if only in the short term), the impetus to address the sustainability crisis rests with activists and corporations. Shareholder primacy and the drive for quarterly profits blind many companies to the long-term impacts of climate change and resource depletion, even though their companies’ profits depend on scarce raw materials, increasingly expensive energy and a permissive regulatory climate.

In the face of such chronic short-termism, businesses that are incorporating environmental sustainability principles have a strategic advantage. They know that long-term survival depends on aggressive action today. Fortunately, their interests are aligned with the common good—for once.